This question should probably read which Forex trades should I make today? Because one the principal attractions of Forex and CFD trading is the fact that they offer traders the ability to trade long (buy) or short (sell) with equal ease. Allowing them to take advantage of trading opportunities, in both directions, as and when they present themselves. But, however we word the question, as with all things related to the Financial Markets, there is not one hard and fast answer. Not least because each day in the markets presents its own challenges and opportunities, whilst each trader's mindset, circumstances and trading strategy will also vary.
One approach that we could adopt might be to let the market tell you what to trade. What this effectively means is to let momentum (price action) guide you. For our purposes here let's assume you are based in Europe or trade the European session.
Remember that Forex trading takes place within a 24 hour a day, 5 day a week market. But within each trading day there are said to be three distinct sessions. These are the Asian, European and US sessions. As the business day in one region moves into the afternoon and towards its close, so the next region opens for business. In this way the markets overlap to form a continuous trading and liquidity infrastructure.
The European, or London session (for that's what it really is) straddles the later part of the Asian session and the opening of the American markets. Given the Global Macro nature of FX trading (Forex markets are often affected and driven by data and news flow that is “ top down” or Macro and Global in nature, rather than localised or “Micro” or bottom up) Then the price action trends or momentum, that have shown themselves in the Asian session, may continue into London trading. And because more than half of each days global Forex volume can be traded in London, those moves may even accelerate during this session.
For example research from the Bank for International Settlements (or BIS) shows that a large proportion of Yen trading and by extension therefore Dollar Yen trading, can take place outside of Japan and the Asian session. So price changes in Dollar Yen, that create an upward or downward trend, during the Asian session, could gain additional momentum in London trading.
Looking for, identifying and joining these trends in the Yen, or other Asian pairs and crosses, is one way to answer the question posed at the top of the page. Of course we can't just assume that what started in Asia, or indeed any other session, will automatically continue into subsequent sessions. Indeed some traders will take the view that that these type of trends may in fact lose momentum, or if you prefer run out steam. As the trading day progresses and they move farther away from their home markets. These traders contrarian strategy would be to oppose the trend or more specifically to look for confirmation that the trends momentum is fading and then oppose it.
Lines in the Sand
Another approach to picking out what to trade on any given day might be to look for prices that are approaching “ lines in the sand”. For example horizontal support and resistance, or indeed session or period highs & lows. A break of, or failure at one of these key price levels could be the just the kind of call to action that traders are looking for. As they can inform their trading and give them a price point or levels to base a fresh position around.
For example, a retest to an area of horizontal resistance, that was in play for several weeks earlier in year. (Particularly if it remained intact during that period) presents a really interesting opportunity. If the current price tests to this resistance, but fails to make further headway. Then logic suggests that this testing and rejection could signal a selling opportunity. Whilst if the price moves above the historic resistance or high, sustains that move (and in an ideal world prints higher still) then we have the makings of potential breakout to the upside.
Forex traders are famous for their use of indicators, which they usually deploy in conjunction with price charts. There are quite literally hundreds of these indicators but they largely all serve the same purpose. Which is to highlight the points where price action could change direction or under certain specific circumstances over or under shoot. One of the most popular indicators, particularly amongst those that are relatively new to trading and or technical analysis, is RSI or the Relative Strength Index.
This indicator compares the characteristics of current price action to those of historic price action. In doing so the indicator endeavours to show traders when a price is exhibiting overbought or oversold behaviour, from which it could well correct.
To do this the indicator sets upper overbought) and lower (oversold) boundaries, within the maximum and minimum indicator values of 0 &100%. These boundaries are set at readings of 70% and 30% respectively and the indicator plots a line between these values. That line represents the current price in ratio to the historic price period. Usually a rolling calculation of 14 prior periods, be they days, hours or minutes.
Traders might choose to open a trade as the RSI indicator line approaches the respective overbought (70) or oversold (30) boundary. Particularly if the move to the RSI boundary coincides with a test, by the underlying price, of support or resistance levels or of period highs and lows. Note though that indicator line can move through the upper or lower boundaries without the underlying price correcting and that RSI readings vary depending upon the duration of the periods being measured.To the extent that a 1 minute RSI reading may suggest a price is oversold whilst the daily measure could indicate a price remains overbought. Which signal you choose to follow will depend on your trading style and time horizons.
Of course you may prefer not to use Technical Analysis at all to generate or identify trade ideas. But prefer to rely on Fundamental Analysis instead, as many traders choose to do.The good news is that if you do adopt this approach there will be plenty of potential trading opportunities for you.
Remember that we noted above that Forex is driven by Global Macro data. That is big picture, top down news and information. Much of this Macro information comes in the form of economic data releases that track the performance of key metrics within an economy or groups of economies. Many of these data points are common to both the developed and developing economies and are calculated using the same methodologies. Which means that direct comparisons can be made between the data for various currencies / countries.
What is more, this data, is for the most part, released in an orderly fashion at pre-announced dates and times.That information is collected and displayed in an economic calendar, which Blackwell Global clients can access for free here.
The data releases are also classified in terms of their expected market impact. From high to low and the calendar can filtered by this metric, as well as by individual currencies. So for example if you are only interested in upcoming “high impact events”, in three or four FX majors. You can set the filters for this and exclude all other events from the calendar view.
Previous data points and where available, a consensus forecast for the upcoming release are also displayed. Armed with this data users can literally trade the calendar.
Though of course a correct interpretation of what the data release really means for price action is essential. It’s important to note as well that liquidity may be reduced and volatility heightened around major news events. Such as Non Farm Payrolls (US unemployment data) and key central bank meetings, as many market participants move to the sidelines for a few minutes before and after the data release.
Whether you utilise Technical Analysis and indicators or follow data driven Fundamental approach to trading one of the best ways to refine your strategy, before you trade it in the live market, is via a Demo Forex trading account
.This offers users a risk free, yet highly realistic simulation of the live trading environment. Once you have honed a strategy that works for you. You can apply for Live trading account
, make a deposit and start to trade for real.